Our secret love for the big banks

In the wake of the RBA’s decision on monetary policy yesterday and as we await the follow up decisions of the major banks, I thought it might be useful to think why Australians remain so loyal to the big banks even when there is a better deal to be had at another financial institution – such as a mutually owned credit union, building society or mutual bank.

Lets kick off by looking at the subliminal mind and then I will refer you to Clancy Yeates excellent article in the Fairfax press earlier this week on emotion in banking and why we are all so sticky with the big four.

As a behavioural economics and finance guy I am fascinated by how our individual and collective behaviours shape our world and our economy. This study has lead me to research what makes our minds tick and how that impacts on our behaviours: works such as Edward Bernays (Sigmund Freud’s nephew) and his titles such as PropagandaPublic Relations and Crystallising Public Opinion are importantI stumbled onto his works via Dave Lakhani and his work on persuasion and subliminal persuasion. More recently, The Economist  reviewed “Subliminal: How Your Unconscious Mind Rules your Behaviour” by Leonard Mlodinow which is also useful. The Economist says,

experimental evidence suggests that, as Freud suspected, conscious reasoning makes up a comparatively small part of the activity in our brains, with most of the work taking place where we can’t tap into it. However, unlike Freud’s unconscious (a hot, claustrophobic place full of repressed memories and inappropriate sexual fantasies about one’s parents) the modern unconscious is a place of super-fast data processing, useful survival mechanisms and rules of thumb about the world that have been honed by millions of years of evolution.

Dead right – too bad conventional macro and micro economics haven’t cottoned onto this fact. Even now after the GFC happened!

Which brings me to Australian banking and why, even in the face of better deals elsewhere, Australians remain so loyal to the major banks relative to their smaller competition.

Yeates poses the question nicely in Fairfax:

THERE’S a paradox in our relationship with the big banks. Whenever they refuse to pass on official rate cuts in full – a trick they may well try again this week – anti-bank rage boils over. Much of the outcry is justified, especially when the banks’ motivation is to sustain profit margins despite anaemic credit growth. And yet, very few consumers take the next step and ditch their bank. Why?

Excellent question. When I was doing my Master in Applied Finance I remember the moment a lecturer said that we love to hate our banks but that they are our banks and we trust them. There is something to this thinking. As Yeates says:

It’s not for lack of information. According to figures from Canstar, the big four’s average standard variable mortgage rate is 7.4 per cent, compared with 6.85 per cent at a credit union or building society. Treasurer Wayne Swan constantly urges customers to vote with their feet if they think they’re being gouged. He’s probably dusting off talking points on this very topic ahead of tomorrow’s Reserve Bank meeting, at which most economists expect a cut that may not be passed on in full.

So if we really cared so much about interest rates, surely more people would switch lenders, right?

Of course we would but that would necessitate that we are truly the rational actors of modern finance. But as Yeates says:

For all the hype over bank gouging, only 3 per cent of customers change banks each year, a 2008 study found. The idea of switching hadn’t even occurred to 43 per cent of people surveyed by the Australia Institute in late 2010.

So here are the questions we need to ask ourselves both individually and as a nation:

  • If all the deposits are guaranteed in the same manner at $1 million when the survey, quoted above,was done and $250,000 now regardless of which ADI you are at;
  • If all ADI’s are regulated by APRA and if arguably the standardised approach that APRA uses for the Credit Unions and Building Societies is harder on them and makes them less risky relative to their largely self assessing Major competitors
  • If it is usual for the Mutuals to have much higher capital adequacy, much simpler business models, generally lower credit problems and much more stable funding then the Majors

Then why don’t people switch?

Now I’ll try to answer that in a moment but it is important to note that the mutuals are owned by their members not shareholders so they aren’t desperate for growth in the way the majors are. They only need to be relevant to their constituency and meet their own targets. In this way most mutual have a dedicated geographical or industry based constituency to which they market to and have strong relationships with. This is starting to change as organisations like CUA covet a broader national footprint but for the most part the above is true of all mutuals.

And in aggregate they have been very successful holding 11.4% of total household deposits, just behind the NAB with 12.8% but well behind the CBA group with 25.7% of the market – according to the Abacus website.

So it’s not like nobody is listening. Mutuals genuinely are the 5th force in the Australian banking landscape. Rather it is that for too long in this economy competition in banking is code for loan originations.

But getting back to the question of why people won’t shift, and why the better rates on term deposits generally available at credit unions and building societies, as well as the lower rates on home loans, isn’t translating into a swiftly growing market share, Clancy Yeates takes us back to the subliminal and behavioural side of things:

despite the government underwriting nearly all deposits, there is a lingering  misconception that the big four are safer. This works in the big banks’ favour,  because it makes people more reluctant to shop around.

Understandably, it’s a misconception the big banks subtly reinforce through  advertising, on which they spent more than $1 billion last year. And what  messages do the  ads often convey? The idea they are safe and secure, of course.  For example, have you noticed that the big four banks prefer to compare their  interest rates to other big four banks?

The subtext is that a responsible adult wouldn’t even contemplate going to a  smaller player – not with a big important decision like who to do your banking  with – so it’s not worth even comparing their (often cheaper) rates.

Bingo!

This is where the behavioural finance and subliminal thinking combine to explain why. Australia’s major banks have for a large swathe of the Australian population captured their minds over generations and through various advertising message means and fora.

If anything it seems to me that the GFC arrested what had become an emergent trend toward bank disintermediation at a household level with the growth of the mutual sector and the non-ADI lenders in the 1990s. And not just because of funding and its availability. Indeed, were it not for the AAA rated Australian Government guarantee in 2008 and 2009 Australia’s majors might not have fared much better than some of their foreign counterparts in offshore funding markets. But for all the governmental suggestions about competition when push came to shove they backed the majors as simply Too Big to Fail and charged them less than their smaller rivals for the privilege.

So the impact has been that at both a conscious and subconscious level the GFC reinforced the major’s message of strength even as it was large not small financial institutions that teetered and fell around the world.

We all know that the government is now trying to encourage more competition. Consumers likewise want more competition for their business.

But you can’t have it both ways – Australians can’t complain about bank competition and not passing on RBA cuts but show little or no implication to punish them by switching financial institutions.

Have a great day

Gregory McKenna

www.twitter.com/gregorymckenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

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Comments

  1. fewlishMEMBER

    We are in the process of shifting lenders, not so much for a reduction of IR (although there is a minor one) but more for added features, one of which is a Master Limit. This option allows a total debt ceiling to be established, and then up to 10 separate investment accounts to be created against home equity for other uses.
    Benefits include easy investment credit at IRs usually only reserved for home lending with no questions asked. Drawbacks are the obviously the myriad of ‘equity mate’ situations you could get yourself in….
    Currently this facility appears to be offered by only a few (AMP, Citibank) however if anyone in MB could provide a mutual I would love to hear it…

    We are only talking about the cost of (investment) money after all….

  2. For loans/mortgages, changing banks should be quite easy (I wouldn’t know, never had to do it).

    But changing your transaction accounts and savings accounts is a pain in the ass! It’s almost as annoying as moving house and having to change your address on everything.

    • changing your transaction accounts and savings accounts is a pain in the ass

      Not really. I did it recently and it was a cinch.

      I stick with the big 4 because I like convenient access to my money all over Australia.

      • Yep, I’d second that – I’ve moved savings & transaction accounts 3 times in the last 6 years and it’s relatively straightforward. However, your point about easy access to money is what I think drives a lot of people to stick to the Big 4 – I’m not with them for either the loan or savings/transaction, but the transaction account offers access through one of the Big 4’s network, so I guess I’m still tied to them in a way. Without that, I’d be hard pressed to stay away.

        • Yep agree, this is the ATM network CUA uses. Very convenient as is their internet banking.

          I never looked back when I switched all my banking to them from one of the Big 4.

  3. This is a frustrating post. We’re presented with 2 arguments:

    1) Behavioral economics is great, and neoclassical assumptions are simplistic and wrong. People just aren’t rational.

    2) Consumers do have a rational relationship with banks, they just overestimate the risk of banking with a small establishment (due to unfamiliarity, and the impact of advertising), and are dissuaded from changing as a result of inertia and transaction costs (informational and financial).

    Argument 1 is very common online, true in situations, but very much overused. This article would have been more coherent and insightful if it was excluded.

  4. I think people with mortgages/loans should/would consider switching from Big Banks.

    I use Big Banks for investment accounts because of convenience of use i.e. quick transfers, online banking etc

  5. I believe you got this one wrong. In my opinion, the main reason why people don’t switch when the Big 4 don’t pass on rate cuts has nothing to do with psychology or convenience.

    Rather, I would suggest, it has a lot to do with the underlying valuations and mortgage debt. Would people get the same size mortgage in today’s economic environment and under stricter lending practices to allow them not to be out of pocket if they changed lender? I doubt it.

    • Smaller lenders tend to be a bit bouncy in their rates, so whilst you can usually get a better rate from a small lender, that rate is variable and it may not be the best rate in 6 months.

      Smaller lenders tend to be less competitive on fixed rates unless they are having a drive on numbers. When your fixed term comes to a close, another great fixed rate may not be available.

      The big kicker though is, if everyone tried to move, the small lenders wouldn’t be able to fund them, so they must remain niche lenders. In fact I would be concerned if any lender grew too quickly, I would avoid that lender.

      • Deus Forex Machina

        Interesting that you say smaller lenders are a bit bouncy because having sat in the pricing committee of an ADI for a number of years and watched their moves vis a vis the majors I hadnt noticed that.

        Perhaps its the demand managment side via turning specials on or off which flows from their ability to fund as you note in your 3rd point.

        In terms of fixed some of the bigger small lenders such as Heritage and CUA and my old shop the Perm in Newcastle are generally fairly good on fixed rates over the cycle I’ve found.

        I am very interested in all these comments so thanks Peter and everyone else

        cheers

        Greg

  6. “..even when there is a better deal to be had at another financial institution..”

    I think your premise is flawed, most customers of the big 4 don’t pay the standard variable rate – for example a typical CBA customer with an ongoing 70 basis point discount would be paying 6.71% at the moment.

    I’m not sure what (if any) discounts are available from credit unions, I briefly used a credit union in the 1990s but they had problems delivering a reliable service – for 3 weekends in a row I couldn’t withdraw any money or pay by EFTPOS, despite having cleared funds – I’m not in a hurry to repeat the experience.

  7. Does anyone actually know what the govt guarantee actually means if a financial institution goes bust? i.e. the process.

    Will the govt provide liquidity to the institution allowing depositors to immediate withdraw their funds? Or will it go through a convoluted ASIC fund shutdown which drags on for years with depositors earning 0% interest in the meantime?

  8. I’ve looked at switching to a credit union a couple of times for everyday banking. Unfortunately I would actually be paying more–either through a monthly account fee or a very limited number of ‘free’ transactions–with a credit union than with my big 4 bank. If I was getting a mortgage, on the other hand, credit unions may provide a cheaper loan.

    • Melissa
      ME bank has 15 free eftpos transactions per month. If you need money just withdraw everytime you shop at Coles/aldi etc.
      Internet banking is free. Of course you pay $2 if you withdraw at an atm, but why would you bother? your card may get skimmed. It is better to withdraw at a retail outlet and more secure. The only problem is there may be a limit of no more than $100 per withdrawal. Although I have seen people withdraw up to $150-$200

  9. Deus Forex Machina

    A mate of mine just emailed me with his thoughts

    “I think the one thing you have missed in your analysis about change is that people are pretty lazy when it comes to change – it’s easier to whinge and be part of a pack then to take the time out necessary to get a new loan or savings account.

    Getting a new loan is a pain in the proverbial, and you have to provide a lot of data and time to get the loan.

    And bottom line – anyone who provides a financial service is seen as a bank by most people – they do no differentiate between them.”

    greg here again – Perhaps its just the age old problem of tangibilising a fincials service – its not like coke, or holidays or cars its much harder to get the tangible benefits across unless you have a bonded geographic or industry constituency – interesting

    • I think that your mate is on the money, but it’s not just laziness.

      Sitting in front of a complete stranger and giving them all of your income details, the details on your assets and liabilities, credit cards, having someone look over your savings account statements which to an experienced lender is like a diary of your spending habits, and then checking your credit file, is the financial equivalent of “undressing in front of strangers”

      On just a few sheets of paper or on a computer screen, your worth and money management abilities are summed up, and it’s not always pretty.

      The process can make many people feel uncomfortable. As a rule we don’t like our “financial genitalia” on display in broad daylight.

      • And of course, after you have showed them your privates, if they say “no thanks” it can be crushing.

        Including “Secret Love” in the headline was apt.

    • DFM

      Can’t fault the home spun logic from you and a number of critics, but I’d like to make 2 points

      1. Around 37% of mortgages settled each month are refinances. That’s a high number, so what’s the explanation? Possibly its not so hard if you’re increasing the balance

      2. Under the amendments to the Banking Act and without the benefit of the much higher capital held in the mutual’s sector,Deposits are much safer in a small mutual than any of Mega Bank’s arms. Mutuals need to promote this if they want to increase deposits. Perhaps they don’t

      • Deus Forex Machina

        Ahh Deep T I was hoping you were going to comment today –

        Point one is very good one – so its not about the difficultly of the paperwork per se but it might be about the credit standards of the CUBS which are tighter in general than the bigger boys

        your second point is so spot on – I think they mutuals will do more of that when the impact of the majors chasing their depositors for the sticky deposits starts to reveal itself

        cheers
        greg

        • So a deduction from the the facts and arguments is that mutuals have higher credit standards than Mega Bank and therefore higher quality assets but this forces the less quality assets onto Mega Bank’s balance sheet. Yet the mutuals would have more than 3 times the capital than Mega Bank.

          Has anyone told APRA?

  10. Reasons not to switch banks: paperwork when opening the account (100-point ID check, mainly), updating direct deposit instructions, updating direct debit instructions, setting up security on the new bank’s web site (e.g., username and password, SMS security codes), waiting for new cards to arrive, learning how to use said web site, and going to the old bank in person to shut down the old accounts (where one often has to listen to a tedious sales pitch and offers to entice you to stay). All the while bearing in mind that if one step goes awry or gets delayed, your pay might not show up and bills might not get paid.

    Reasons not to switch to a CU: they often have local focus and might not be present in your area; access might be limited, both offline and online; if you can’t find the appropriate ATM you’ll be stung with a fee every time you want to withdraw your money.

    Much as people here might say this is all of no consequence, a lot of ordinary people would have to expend considerable time and effort to get over these barriers.

    My impression is that there’s very little loyalty to banks these days, and most people would switch, if it wasn’t so much effort.

    • bv2726MEMBER

      Completely agree with the above. Just changing the direct debit / bill payment items for a normal household can be so time consuming its not worth it. (I just did it…still haven’t finished..)

  11. Our banks are the worst type of predatory organisation I can think of.

    Society provides them with the licences and permits they need to conduct business in Australia. Yet they fail to see that they need to deliver to the communities in which they operate.

    When companies make super profits and can double or triple their market cap, one must question whether the market is sufficiently competitive.

    Sure, companies have an obligation to their shareholders. But an ethical company will seek to share the benefits of commercial success with employees, customers and society.

    These are evil companies and society would be better off without them.

  12. Staying with the CBA is because the idea of changing all my direct debits is the biggest disincentive.

    Was there talk about making that automatic? Forwarding all direct debit requests to your next institution?

    Knowing there are lots of ATMs to get cash is good. I hate the idea of paying $2.

    Being able to call 24 hours a day about regular stuff is good. Being in WA I hated the 2pm deadline to calling some eastern state call centre during summer.

    I think that my current interest rate of 6.41% loan is good?

    It’s also great to have branches everywhere. The smaller institutions don’t have that.

    Finally, I think the online CBA experience is awesome. Westpac suck, BOQ suck, StateWest sucked, and who bought statewest (Homesomething) sucked. None of them have improved their sites since I used them. CBA is constantly updating and upgrading.

    • Last time I changed my loans 4 years ago now? It cost about $600-$1000 to change everything. So Excel told me it would take 2-3 years of interest rate ‘savings’ before I would actually break even and start being better off. That’s a massive thing considering the financial companies seem to trade having the best rate over the years. In 2006 when I started it was BankWest, then in the end of 2008 it was CBA. Now who knows it is.. but in 2-3 years it will be CBA again I assume.

      Finally, if you say that the credit unions or smaller banks are just as good, why did macrobusiness highlight BOQ lost money in the last 6 months. Or that BankWest was bought out in a panic.

  13. I read the original article in question. I was ready to switch (or in my case get the loan) with them.

    I immediately went looking for the credit union or building society that would give me such a great deal. Guess what? They are not that competitive.

    Megabank still has the best rates/products.

    Where are all the great deals I’m missing out on? Please enlighten me. Seriously.

    -gt

  14. It’s often far simpler than that.

    Step 1:
    Dollarmites. Remember them?
    Banks create relationships with children in primary school with basic savings accounts.

    Step 2:
    Banks let just turned 18yo’s have credit cards and personal loans at the same time. Ie more money than they’ve seen at that age.
    Often they learn the hard way (I did), but the banks avoid saying no to people. Apparently most of us learn responsibility eventually.
    By this point, you’ve already been a customer for over 10 years.

    Step 3:
    Laziness. Not so much a step as an attribute of humanity.

    I am with commbank for these reasons. I’m up over 20yrs of history by now. They never say no when I ask. I’m lazy.

    When other banks step into primary schools, you’ll see their customer numbers/profits rise in about 15 years.